Democrats are planning to reintroduce legislation that would allow bankruptcy judges to modify the terms of troubled borrowers’ loans — a move that industry opponents say will lead to higher interest rates and down payments for all borrowers.

Democrats are planning to reintroduce legislation that would allow bankruptcy judges to modify the terms of troubled borrowers’ loans — a move that industry opponents say will lead to higher interest rates and down payments for all borrowers.

Rep. Brad Miller, D-N.C., said he plans to introduce a bill today allowing bankruptcy "cramdowns" of mortgage loan principal, the Wall Street Journal reported. Sen. Richard Durbin, D-Ill., plans to sponsor similar legislation in the Senate, the paper said.

Miller said it’s clear that voluntary efforts by lenders to modify the loans of troubled borrowers are "just not working" to prevent foreclosures.

Mortgage Bankers Association chief lobbyist Francis Creighton told the Wall Street Journal that its members have modified 2.8 million loans. The MBA has opposed cramdowns because the group says they could lead to higher losses for lenders and undermine the confidence of investors who buy mortgage-backed securities that fund most loans (see story).

But critics say that so far, loan modification efforts have largely been focused on reducing monthly payments rather than forgiving loan principal — the only way to restore equity for the one in six homes now worth less than its mortgage. While the National Association of Home Builders has opposed cramdowns in the past, the trade group now says the idea is worth considering, according to the Journal.

President-elect Barack Obama expressed support for cramdowns during his campaign, and the Journal said changes to the bankruptcy code could be included in the economic stimulus package Congress is expected to put forward early in the new year.

The stimulus package is also likely to include a proposal by FDIC Chairwoman Sheila Bair that the government partially insure lenders who agree to modify loans under criteria developed the FDIC, the Journal said. The $24 billion program could prevent up to 1.5 million foreclosures, the FDIC estimates, by guaranteeing up to 50 percent of participating lenders’ losses when they agree to modify troubled borrowers loans (see story).

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